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More cuts to boost GDP seen

THERE will be more frequent cuts to Chinese banks' reserve requirement in the second half of the year to maintain a stable recovery, economists said.

The government is expected to maintain its loose monetary policy with steady interest rates but "frequent cuts on the reserve requirement" in the second half of the year to boost gross domestic product, said Lu Zhengwei, a Industrial Bank's senior economist.

The move to trim the reserve requirement in order to free more liquidity is probably due to an expected fall in new credit along with the resumption of initial public offerings in the second half of the year, analysts said.

New yuan lending at banks in China hit a record high of 5.17 trillion yuan (US$757.2 billion) in the first five months of this year, which has already surpassed the government's new credit target of "at least 5 trillion yuan."

China has shifted to a relatively easier monetary policy since November to trigger economic growth amid the global financial crisis.

New yuan credit in China has kept rising since late last year as the government scrapped lending quota, cut interest rates five times and scaled back banks' reserve requirement four times to free credit in the second half of 2008.

Ken Peng, a Citibank economist, agreed that more reserve cuts to free liquidity are likely.

"The 14 percent to 15 percent reserve requirement still appears too high and could be reduced," Peng said, adding that he does not see more interest rate cuts.

Several institutions have increased their forecast for China's economic growth this year, including Royal Bank of Scotland, UBS, Morgan Stanley, and Goldman Sachs.

The government is eyeing an 8 percent economic growth this year while the World Bank and the International Monetary Fund have predicted a 6.5 percent rise.

"China's economy has recovered from its trough in the fourth quarter of 2008," said Standard Chartered Bank in a research report. "However, this recovery is unlikely to be a robust, V-shaped one," as the bank maintains its forecast of a U-shaped recovery.


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